Potential Environmental Liability associated with Condo Lending

October 9th, 2013 by Geoffrey di Mauro Leave a reply »

Recently a lender client asked whether there was any environmental liability that could attach to a borrower planning on purchasing a condominium in a high rise residential building, apart from potential Asbestos, Lead based paint or mold issues (which may also be issues depending on the age and condition of the building). The client was considering lending funds to a borrower for the purposes of buying a unit in a building where the condominium association (CA) was actively working with the Florida Department of Environmental Protection (FDEP) on a cleanup action associated with historical environmental impacts in the common areas of the premises. Apparently, the building had been constructed on a site with historical environmental impacts and now the FDEP was requiring the CA to address the residual impacts.

The question that the client had was whether any liability for the environmental impacts would attach to the borrower in this situation. The client correctly pointed out that the borrower was buying a unit not touching or affected by the identified impacts, was not a cause of the impacts and whose ownership of the unit would not exacerbate the impacts.

In this circumstance, as regards the historical impacts associated with the common areas, the answer is to be found in the CA rules, bylaws, covenants and restrictions (hereafter referred to collectively as the CA Documents). In general, it is recognized and acknowledged that certain dues, fees and other obligations are imposed on unit owners for the upkeep, maintenance and repair of the building and facilities, including the common areas. Special assessment may also be imposed from time to time for various identified projects as approved under the CA Documents. All these dues, fees, obligations and assessments are hereinafter referred to as Costs.

Whether the environmental costs and expenses incurred by the CA in this particular scenario may be included in the Costs assessed against the unit owners is determined by what is covered under the CA Documents. If the CA Documents permit the CA to impose a special assessment on the unit owners for things like the environment impacts noted above, then this is a form of strict environmental liability via contract, and without regard to fault or causality. The client would then have to consider whether such special assessments might impair the borrower’s ability to service the proposed loan, or, if in a case of default, whether client lender might be seen as stepping into the shoes of the borrower as far as being responsible for CA Costs. The Lender Liability Act of 1996 is not clear on this issue since CA Costs are not specifically identified as an avoidable liability, even if, in this case, those Costs are being used to address environmental impacts by the CA.

While the client could certainly put forth a claim of immunity from liability under the 1996 Act, the caselaw in this regard does not appear settled as regards CA Costs, even if assessed to cover environmental impacts, so the client would be faced with the prospect of an uncertain legal outcome, with all the attendant fees and costs of defense.

These are elements that a client lender should consider when contemplating loans for condo units where there is an identified environmental impact(s) which the CA is actively addressing.